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TMI Blog2009 (8) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... joint ventures, vendors etc., which is sold at a price. - 5554-55 of 2009 - - - Dated:- 17-8-2009 - S.H. KAPADIA and AFTAB ALAM, JJ. Civil Appeal No. 5554 of 2009 (Arising out of S.L.P. (C) No.3826 of 2009) WITH Civil Appeal No. 5555 of 2009 - (Arising out of S.L.P. (C) No.5362 of 2009) [Judgment per S. H. KAPADIA, J.] - Leave granted. FACTS IN THE LEAD MATTER 2. The issue in the present civil appeal is : whether the Department is right in reversing proportionate CENVAT credit to the extent of power wheeled out by the appellant to its sister units, vendors, joint ventures. Basically, in both the civil appeals we are required to construe the word "input" as defined in Rule 2(g) of CENVAT Credit Rules, 2002. 3. M/s. Maruti Suzuki Ltd. (appellant) is engaged in the business of manufacturing motor vehicles falling under Chapter 87 of Central Excise Tariff Act, 1985. These motor vehicles are cleared on payment of duty. Assessee claimed CENVAT credit on "input" in accordance with CENVAT Credit Rules, 2002 (for short, "2002 Rules"). Assessee has installed three gas turbines in their factory for generation of electricity. All the thre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of duty paid on it and there is no need to reverse proportionate credit to the extent of power wheeled out to joint ventures, vendors etc. According to learned counsel, Rule 2(g) of the said 2002 Rules which defined "input", was in two parts. The first part was the specific part which was followed by the inclusive part. In the inclusive part several items stood included such as lubricating oils, greases, cutting oils, coolants, accessories, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used for manufacture of final products or for any other purpose, within the factory of production. There is no dispute that the appellant had used naphtha as fuel for generation of electricity, hence, the said item fell within the inclusive part of the definition. According to learned counsel, there was a condition in the specific part of the said Rule, namely, "that the goods must be used in or in relation to the manufacture of final product", however, that condition did not apply to goods falling under the inclusive part of the definition of "input". Therefore, once the fuel stood admittedly used in the factory for generation of electricity, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s partly used for captive consumption and partly in other units of the appellant it was not open to the Department to deny credit on the ground that part of the electricity was cleared outside the factory to the joint ventures, vendors etc. In this connection, it was submitted that under the said Rules, a manufacturer of final product was allowed to take credit of specified duty paid on any input received in the factory after 1.4.2002. There was no condition attached to it. Hence, it was not open to the Department to deny credit on the ground that part of the electricity stood cleared outside the factory to its joint ventures, vendors etc. According to learned counsel, Rule 3(1) of the said 2002 Rules permitted credit to be taken on inputs received in the factory whereas Rule 3(4) required credit to be surrendered on removal of input as such, therefore, when the goods received in the factory were used as fuel and the said goods were not removed from the factory, credit of duty paid on fuel became undeniable. Learned counsel next contended that under Rule 6(1) when input was used in the manufacture of exempted goods, credit was not admissible. However, Rule 6(1) was not attracted to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oolants which also fell within the definition "if used within the factory of production". In fact, according to learned counsel, the said items stood specifically included to clarify doubt as to whether the said items could be used within the factory of production. In the alternative, it was submitted that the appellant has used naphtha in the generation of electricity, part of which has been consumed outside the factory or production; that the said input has not been used as fuel per se but it has been used for the specific purpose of generation of electricity consumed outside the factory of production and consequently the said naphtha would not fall within the definition under Rule 2(g). Coming to the interpretation of Rule 6 of the 2002 Rules, learned counsel submitted, that where electricity stood generated but sold outside the factory to third party, the said rule was not applicable. According to learned counsel, electricity generated as a final product was neither exempted nor chargeable to `nil' rate of duty hence in such cases Rules 6 was not applicable. According to learned counsel, Rule 6 was applicable to cases where the final product was either exempted or charged to `n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose, within the factory of production. Explanation 1.- The light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any purpose whatsoever. Explanation 2.- Inputs include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer; RULE 3. CENVAT credit.- 1. A manufacturer or producer of final products shall be allowed to take credit (hereinafter referred to as the CENVAT credit) of - i. the duty of excise specified in the First Schedule to the Tariff Act, leviable under the Act; ii. the duty of excise specified in the Second Schedule to the Tariff Act, leviable under the Act; iii. the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act,1978 ( 40 of 1978); iv. the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 ( 58 of 1957); v. the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of 2001), as amended by clause 161 of the Finance Bill, 2003, which clause has, by v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s cleared after availing of the exemption under the notification numbers 32/99-Central Excise, dated the 8th July, 1999 [G.S.R.508(E) dated the 8th July, 1999] and 33/99-Central Excise dated the 8th July, 1999 [G.S.R.509 (E) dated 8th July, 1999], shall be utilized only for payment of duty on final products cleared after availing of the exemption under the said notification numbers 32/99-Central Excise, dated 8th July, 1999 and 33/99-Central Excise, dated the 8th July, 1999.] Provided also that the CEENVAT credit of the duty paid on the inputs used in the manufacture of final products cleared after availing of the exemption under the notifications No.39/2001-Central Excise, dated the 31st July, 2001 [G.S.R.565(E), dated the 31st July, 2001], No.56/2002-Central Excise, dated the 14th November, 2002 [G.S.R. 764(E), dated the 14th November, 2002], No.57/2002-Central Excise, dated 14th November, 2002 [G.S.R.765(E), dated the 14th November, 2002] and No.56/2003-Central Excise, dated the 25 th June, 2003 [G.S.R.513 (E), dated the 25th June, 2003] shall respectively be utilized only for payment of duty on final products, in respect of which exemption under the said notifications No.39/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted undertaking or by a unit in an Electronic Hardware Technology Park or Software Technology Park (other than a unit which pays excise duty under section 3 of the Act read with notification No. 8/97- Central Excise, dated the 1st March, 1997, number G.S.R 114 (E), dated the 1st March, 1997 or No. 20/2002-Central Excise, dated the 1st March, 2002) and used in the manufacture of the final products in any other place in India, in case the unit pays excise duty under section 3 of the Act read with notification No. 2/95- Central Excise, dated the 4th January, 1995, number G.S.R. 189 (E), dated the 4th January, 1995, shall be admissible equivalent to the amount calculated in the following manner, namely:- Fifty per cent. of [ X multiplied by{( 1+ BCD/100) multiplied by ( CVD/100)}], where BCD and CVD denote ad valorem rates, in per cent., of basic customs duty and additional duty of customs leviable on the inputs or the capital goods respectively and X denotes the assessable value. ii. in a Special Economic Zone, and used in the manufacture of the final products in any other place in India, shall be admissible equivalent to the amount calculated in the following manner, namely:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of non- availability of credit of duty paid on any input or capital goods, the provisions of such other rule or notification shall prevail over the provisions of these rules. Rule 6. Obligation of manufacturer of dutiable and exempted goods.- 1The CENVAT credit shall not be allowed on such quantity of inputs which is used in the manufacture of exempted goods, except in the circumstances mentioned in sub-rule (2). Provided the CENVAT credit on inputs shall not be denied to job worker referred to in rule 12B of the Central Excise Rules, 2002 on the ground that the said inputs are used in the manufacture of goods cleared without payment of duty under the provisions of that rule. 2. Where a manufacturer avails of CENVAT credit in respect of any inputs, except inputs intended to be used as fuel, and manufactures such final products which are chargeable to duty as well as exempted goods, then, the manufacturer shall maintain separate accounts for receipt, consumption and inventory of inputs meant for use in the manufacture of dutiable final products and the quantity of inputs meant for use in the manufacture of exempted goods and take CENVAT credit only on that quantity of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided in rule 12, for recovery of CENVAT credit wrongly taken. 4. No CENVAT credit shall be allowed on capital goods which are used exclusively in the manufacture of exempted goods, other than the final products which are exempt from the whole of the duty of excise leviable thereon under any notification where exemption is granted based upon the value or quantity of clearances made in a financial year. 5. The provisions of sub- rule (1), sub-rule (2), sub-rule (3) and sub-rule (4) shall not be applicable in case the exempted goods are either- a. cleared to a unit in a free trade zone; or b. cleared to a unit in a special economic zone; or c. cleared to a hundred per cent. export-oriented undertaking; or d. cleared to a unit in an Electronic Hardware Technology Park or Software Technology Park; or e. supplied to the United Nations or an international organization for their official use or supplied to projects funded by them, on which exemption of duty is available under notification of the Government of India in the Ministry of Finance (Department of Revenue) No.108/95-Central Excise, dated the 28th August, 1995, number G. S R. 602 (E), dated the 28th August ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 91 read with section 93 of the Finance (No.2) Act, 2004 (23 of 2004); (vii) the additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified under clauses (i), (ii), (iii), (iv), (v) and (vi); (viii) the additional duty of excise leviable under section 157 of the Finance Act, 2003 (32 of 2003); (ix) the service tax leviable under section 66 of the Finance Act; and (x) the Education Cess on taxable services leviable under section 91 read with section 95 of the Finance (No.2) Act, 2004 (23 of 2004), paid on- (i) any input or capital goods received in the factory of manufacture of final product or premises of the provider of output service on or after the 10th day of September, 2004; and (ii) any input service received by the manufacturer of final product or by the provider of output services on or after the 10th day of September, 2004, including the said duties, or tax, or cess paid on any input or input service, as the case may be, used in the manufacture of intermediate products, by a job-worker availing the benefit of exemption specified in the notification of the Government of India in the Ministry of Finance ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the exemption under the 2 0 following notifications of Government of India in the Ministry of Finance (Department of Revenue),- (i) No. 32/99-Central Excise, dated the 8th July, 1999 [G.S.R. 508(E), dated 8th July, 1999]; (ii) No. 33/99-Central Excise, dated the 8th July, 1999 [G.S.R. 509(E), dated 8th July, 1999]; (iii) No. 39/2001-Central Excise, dated the 31st July, 2001 [G.S.R. 565 (E), dated the 31st July, 2001]; (iv) No. 56/2002-Central Excise, dated the 14th November, 2002 [G.S.R. 764(E), dated the 14th November, 2002]; (v) No. 57/2002-Central Excise, dated 14th November, 2002 [G.S.R.. 765(E), dated the 14th November, 2002]; (vi) No. 56/2003-Central Excise, dated the 25th June, 2003 [G.S.R. 513 (E), dated the 25th June, 2003]; and (vii) No. 71/2003-Central Excise, dated the 9th September, 2003 [G.S.R. 717 (E), dated the 9th September, 2003], shall, respectively, be utilized only for payment of duty on final products, in respect of which exemption under the said respective notifications is availed of: (5) When inputs or capital goods, on which CENVAT credit has been taken, are removed as such from the factory, or premises of the provider of output s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se leviable under section 3 of the Additional Duties of Excise (Textiles and Textile Articles) Act, 1978 (40 of 1978); (ii) the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of 2001); (iii) the education cess on excisable goods leviable under section 91 read with section 93 of the Finance (No.2) Act, 2004 (23 of 2004); (iv) the additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified under items (i), (ii) and (iii) above; (v) the additional duty of excise leviable under section 157 of the Finance Act, 2003 (32 of 2003); (vi) the education cess on taxable services leviable under section 91 read with section 95 of the Finance (No.2) Act, 2004 (23 of 2004); shall be utilized only towards payment of duty of excise or as the case may be, of service tax leviable under the said Additional Duties of Excise (Textiles and Textile Articles) Act, 1978 or the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of 2001), or the education cess on excisable goods leviable under section 91 read with section 93 of the Finance (No.2) Act, 2004, resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tput service and the quantity of input meant for use in the manufacture of exempted goods or services and take CENVAT credit only on that quantity of input or input service which is intended for use in the manufacture of dutiable goods or in providing output service on which service tax is payable. (3) Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer or the provider of output service, opting not to maintain separate accounts, shall follow either of the following conditions, as applicable to him, namely:- (a) if the exempted goods are- (i) goods falling within heading No. 22.04 of the First Schedule to the Excise Tariff Act (hereinafter in this rule referred to as the said First Schedule); (ii) Low Sulphur Heavy Stock (LSHS) falling within Chapter 27 of the said First Schedule used in the generation of electricity; (iii) Naphtha (RN) falling within Chapter 27 of the said First Schedule used in the manufacture of fertilizer; iv) Naptha (RN) and furnace oil falling within Chapter 27 of the said First Schedule used for generation of electricity; (v) newsprint, in rolls or sheets, falling within heading No.48.01 of the said First Schedule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the whole of service tax paid on taxable service as specified in sub- clause (g), (p), (q), (r), (v), (w), (za), (zm), (zp), (zy), (zzd), (zzg), (zzh), (zzi), (zzk), (zzq) and (zzr) of clause (105) of section 65 of the Finance Act shall be allowed unless such service is used exclusively in or in relation to the manufacture of exempted goods or providing exempted services. (6) The provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the excisable goods removed without payment of duty are either- (i) cleared to a unit in a special economic zone; or (ii) cleared to a hundred per cent. export-oriented undertaking; or (iii)cleared to a unit in an Electronic Hardware Technology Park or Software Technology Park; or (iv) supplied to the United Nations or an international organization for their official use or supplied to projects funded by them, on which exemption of duty is available under notification of the Government of India in the Ministry of Finance (Department of Revenue) No.108/95-Central Excise, dated the 28th August, 1995, number G. S R. 602 (E), dated the 28th August, 1995; or (v) cleared for export under bond in terms of the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not enter directly or indirectly into the finished product, but are used in any activity concerned with or pertaining to the manufacture of the finished product. 13. Electricity generation is a separate and distinct activity. It is an independent activity. It has its own economics. It does not form part of the process in which "inputs" are transformed into separate identifiable commodity, though it may stand connected to such processes. It may not have any concern with the manufacture of the finished product. However, it is an ancillary activity. It is an activity which is anterior to the process of manufacture of the final product. It is on account of the use of the above expression "used in relation to manufacture" that such an activity of electricity generation comes within the ambit of the definition because it is integrally connected with the manufacture of the final product. 14. In the case of Collector of Central Excise, New Delhi v. M/s. Ballarpur Industries Ltd. reported in (1989) 4 SCC 566 the difference between the expression "used in the manufacture" and "used as input (raw material)" was highlighted. In that judgment, it was held that undoubtedly the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... example, one of the categories mentioned in the inclusive part is "used as packing material". Packing material by itself would not suffice till it is proved that the item is used in the course of manufacture of final product. Mere fact that the item is a packing material whose value is included in the assessable value of final product will not entitle the manufacturer to take credit. Oils and lubricants mentioned in the definition are required for smooth running of machines, hence they are included as they are used in relation to manufacture of the final product. The intention of the Legislature is that inputs falling in the inclusive part must have nexus with the manufacture of the final product. 15. Coming to the analysis of the inclusive part of the definition one finds that it covers: (a) Lubricating oils, greases, cutting oils and coolants; (b) Accessories; (c) Paints; (d) Packing materials; (e) Input used as fuel; (f) Input used for generation of steam or electricity. 16. In our earlier discussion, we have referred to two considerations as irrelevant, namely, use of input in the manufacturing process, be it direct or indirect as also absence of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusive part after the words "steam used" is substituted by the words "used in or in relation to the manufacture of final products". In other words, the crucial requirement of the definition clause is restated by the Legislature. We may note that the CENVAT Credit Rules of 2004 came in force in September, 2004. In some of the cases in batch before us the show cause notice goes right up to January 2005, hence, CENVAT Credit Rules, 2004 also apply to those cases. In short, an item would fall within the category of "inputs" as defined only on compliance with all the three parts of the definition clause. 19. The question which still remains to be answered is: whether an assessee would be entitled to claim CENVAT credit in cases where it sells electricity outside the factory to the joint ventures, vendors or gives it to the grid for distribution? In the case of Collector of Central Excise v. Rajasthan State Chemical Works reported in 1991 (55) ELT 444 (SC) the test laid down by this Court is whether the process and the use are integrally connected. As stated above, electricity generation is more of a process having its own economics. Applying the said test, we hold that when the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t ventures, vendors etc. for a price and has also cleared such electricity in favour of the grid for distribution. To that extent, in our view, assessee was not entitled to CENVAT credit. In short, assessee is entitled to credit on the eligible inputs utilized in the generation of electricity to the extent to which they are using the produced electricity within their factory (for captive consumption). They are not entitled to CENVAT credit to the extent of the excess electricity cleared at the contractual rates in favour of joint ventures, vendors etc., which is sold at a price. 21. Before concluding, it may be clarified that on account of repeated amendments in the CENVAT Credit Rules, huge litigation in the country stands generated. In the circumstances, we are of the view that penalty is not leviable on appellant/assessee, particularly when in large number of other cases, on account of conflict of views expressed by various Tribunals/High Court, the assessees have also succeeded. Hence, although M/s. Maruti Suzuki Ltd. (appellant) has failed in their civil appeals the Department will not impose penalty. 22. For the aforestated reasons, we dismiss Civil Appeal No. of 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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